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21 June 2021

El Salvador 'Legal Tender' Move Unlikely to Change US Tax on Bitcoin: Former IRS Counsel - Decrypt

El Salvador 'Legal Tender' Move Unlikely to Change US Tax on Bitcoin: Former IRS Counsel - Decrypt


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A viral Reddit post published on Sunday claimed Bitcoin’s legal tender status in El Salvador could have “huge US tax and reporting implications.” It argued that the move could lead the IRS to treat Bitcoin like a foreign currency, allowing a $200 tax exemption on each transaction involving Bitcoin.

It’s true that an obscure tax rule—section 988(e)—allows a $200 tax exemption for gains in personal transactions involving foreign currencies—those with legal tender status in any jurisdiction.

But that exemption applies strictly to currency fluctuation gains in personal transactions like buying a cup of coffee or a car, not to profit-motivated transactions like speculative trading, explained Brown, who is now global head of tax and regulatory affairs at blockchain software and data company Lukka.

So for most Bitcoin traders and investors, the current status of capital gains tax is more preferable because the tax rates are generally lower than they would be if Bitcoin were treated as ordinary income.

“If more and more countries were to declare Bitcoin as legal tender, however, then the IRS would have to take a harder look at when something rises to the level of a currency for tax purposes,” he said.

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